Life Insurance – the Good, the Bad and the Perplexing

9-
10mins
15-03-2016
(updated
21-08-2018)

How to get the cover you need – and avoid paying for what you don’t

You may not have noticed, but Australians have a bit of a problem with life insurance. Research by AFA (the Association of Financial Advisers) shows that we believe insuring our cars, homes and health is more important than insuring our lives. Of those of us who already have life insurance, only 29.3% rate it as ‘extremely important’.

If a parent dies or can’t work because of serious injury or illness, the typical Australian family will lose half (and in some cases more) of its income.

For those without life cover, the figure is a dismal 5%. The same research also shows that only 2 out of 10 Aussies receive life insurance-related financial advice.

Okay, so life insurance isn’t the sexiest subject in the world. But it’s still important. And here’s why: if a parent dies or can’t work because of serious injury or illness, the typical Australian family will lose half (and in some cases more) of its income.

Think that kind of situation is too rare to worry about?

Think again – it will happen to 1 in 5 working age parents in this country. And according to the Lifewise/NATSEM Underinsurance Report (2010), the financial situation following such an event will be long term.

The report’s ‘good news moment’, however, is that with adequate life insurance cover, the other partner can repay existing home loan debt and invest the remainder to generate an income that replaces 80-100% of the original income.

When it comes to life insurance, our ‘she’ll be right’ attitude just doesn’t match up with the facts. Here are some statistics worth pondering:

81% of us believe life insurance is too pricey, but 61% overestimate the cost

Half of all Australians are underinsured by $100,000 for life insurance

74% are underinsured for TPD (Total and Permanent Disability) cover

A quarter of men and a third of women will suffer cancer at some point in their lifetime

More than 1200 people die on Aussie roads each year

41% of us think life insurance is too complicated

63% of Australians with a partner report that they haven’t discussed life insurance with their other half. 29% feeling it’s ‘difficult’ or ‘unpleasant’ to talk about.

Household debt in this country grew twice as quickly as the value of our household assets during the past 18 years

It’s important to self-educate about life insurance so you know aren’t relying on old, inaccurate or biased information. The Insurance Council of Australia’s Understanding Insurance website is a useful place to start.

And beware of those pesky life insurance myths that always get thrown around. Here are our 3 favourites:

Of the 3% of claims that aren’t paid, the majority of these are because of serious non-disclosure of medical history on application forms

Myth #1 – Those rotten life insurance companies don’t pay claims!

This one is probably the granddaddy myth of them all – and it’s simply not true. Australian life insurance companies pay more than 97% of all life insurance claims in this country – and most insurers shell out over a million dollars in benefits daily.

As for the roughly 3% of claims that are not paid, the majority of these are because of serious non-disclosure of medical history on application forms.

Moral of the story: when applying for life insurance (both basic and optional cover), always ensure your medical history is completely and honestly disclosed .

This isn’t the time to ‘conveniently forget’ that you’ve had 2 heart attacks, are dealing with pancreatic cancer and have been smoking a pack a day since you were 15.

Myth # 2- I don’t need life insurance!

Young and healthy people who think of life insurance as a luxury rather than a necessity fail to grasp that today’s rosy lifestyle could become tomorrow’s misery if you don’t protect it.

As for older folks looking forward to retirement, the last thing you’d want is for your partner to have to work longer because they couldn’t afford to retire without your income.

Myth #3 – Life insurance isn’t worth it – it’s too expensive!

Life insurance is too expensive?

As compared to what?

Seeing a once-steady income disappear overnight and having to come up with hundreds of thousands of dollars from ‘somewhere’ to meet financial obligations like your mortgage, medical bills, children’s education and everyday living expenses?

The cost of your life insurance premium will depend on many factors including your age, sex, current and family medical history, weight, smoking status, occupation and even your hobbies. With no shortage of online insurance comparison sites to choose from, finding affordable life insurance products that suit your needs is easier than ever – and rest assured, the Aussie life insurance market is certainly competitive.

Insurance 101: Don’t buy what you don’t need

Some forms of insurance are extremely sensible to have (and in some cases even legally required) and these can include life, TPD, trauma, home and contents, health, car and travel insurance that most of us are already familiar with. However, there are other types of insurance that may not be worth the money you pay for them. You’ll have to do your own research and decide for yourself.

Those extended warranties you’re always offered when you buy a new appliance or electronic gizmo are a good example.

There are other types of insurance that may not be worth the money you pay.

Think back to how many times you’ve paid for an extended warranty and the item either (a) never broke down at all or (b) failed within the first year, which meant it would have been covered by the normal warranty anyway.

Extended warranties are classic up-selling that’s great for the retailer, but only rarely useful to you. If the item is super-expensive you can have a look at the cost of the added warranty and make up your own mind, but in most cases, this kind of extra insurance isn’t worth the expenditure.

Have you noticed how many ads for funeral insurance are popping up on TV these days? Sure, funerals can cost a bundle, but you have to be careful with some stand-alone funeral insurance policies.

In some cases, your premiums could go up each year or your cover might be cancelled if you miss payments. It’s also possible that the premiums you pay can add up to more than the benefits.

Check funeral insurance cancellation policies too, to find out if any refund on previously paid premiums is offered should you cancel your policy (normally not).

You may find that your existing life insurance cover already includes some form of funeral benefit in the form of a lump sum advance that can be put toward funeral costs and other expenses in the event of a death in the family. Prepaid funerals are another option to consider, or you can simply set up a funeral savings account and add small amounts of money to it over time.

Have you checked your insurer’s reputation?

We don’t usually have to worry about door-to-door salesmen trying to pressure us into buying dodgy insurance anymore.

The modern Australian insurance industry is highly regulated, tightly controlled and very transparent. It’s now incredibly easy to check out a specific insurer’s reputation online.

Some insurers are cheaper because they’re more careful about who they insure. For example, they may choose not to insure riskier drivers.

How many independent awards a particular insurer has won is a reasonable indicator of their overall quality. Annual awards for insurers (and lots of other industries) can be found on the Canstar website, for example.

Independent (third party) review sites are also available for many insurers. These can give you a pretty good indication of general customer satisfaction.

The Internet has done a lot of great things for people looking to compare insurers. It has made it easy to get quick online quotes, it has made comparing insurers much simpler and it has virtually guaranteed that any insurer who delivers poor service or overpriced products won’t last long – because in cyberspace, there’s no place to hide.

Some insurers are cheaper because they’re more careful about who they insure. For example, they may choose not to insure riskier drivers. They might choose not to insure certain events (floods in specific regions, for example). When you shop around for insurance, you need to compare price and policy options carefully before making a decision.

And (as insurers will tell you over and over again) always read the product disclosure statement relating to your cover. This way you know what you’re insured for and what you’re not. “I didn’t get around to reading the fine print” isn’t a valid excuse for not understanding your insurance. It can also lead to unpleasant surprises down the track.

If you see a quote that seems too good to be true, make sure you’re not falling for a scam.

Is the insurer well known or did the company just pop up out of nowhere?

Are you being pressured to buy a policy over the phone from someone who rang you out of the blue?

Are they who they say they are?

Does the insurance company even exist?

If you see a quote that seems too good to be true, make sure you’re not falling for a scam.

Warning signs of people pretending to be insurers include:

Insurance companies with names you’ve never heard of

Policies that are priced unbelievably cheaper than comparable cover

Agents who want you to pay for premiums in cash or ask you to write a cheque made out to them personally (not the company)

But another danger to watch out for is the old ‘fake insurance website’ ploy. In one high profile case in the UK, a man conned 600 drivers into paying for worthless car insurance policies by setting up 4 fake (but authentic-looking) websites. He made over $1 million (AUD) before being caught, and many victims only became aware of the scam after police seized their cars for being uninsured.

Always beware of emails that ask you to ‘click on this link to update your details’. They may lead you to a bogus website that’s aiming to extract private financial information from you by stealth. The website may look very much like the real thing, but isn’t. When in doubt, contact your insurer directly.

Working Out How Much Life Insurance You Need

There’s no one-size-fits-all formula for determining the ideal life insurance cover for your needs. Every individual and family is different.

But things you may want to factor into the equation include your current and future financial obligations. Not to mention the debts to pay off and what your family needs to financially cope if you can’t work.

Think about what happens if a sudden debilitating illness strikes or you become disabled. What are your existing financial resources and ongoing household expenses?

These are relevant considerations. Work with your insurer so you get the cover you need at a price you can handle – and that gives you the peace of mind that quality insurance brings.

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